Michael Lewis: U.S. Stock Market Is Rigged

Michael Lewis — author of insider books such as Moneyball and The Big Short — said on Sunday that the U.S. stock market was rigged in favor of high-speed electronic trading firms.

[1]High frequency trading (HFT) takes billions from investors and is used by many big banks and trading firms using computer programs.

The programs send out market orders that search for price imbalances, and is the type of trading that makes up more than half of all market trading in the United States.

Michael Lewis discussed the trading method and how it put regular investors at a disadvantage on 60 minutes.

“They are able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price,” Lewis, whose new book “Flash Boys: A Wall Street Revolt”comes out today.

The book details high frequency trading.

“This speed advantage that the faster traders have is milliseconds, some of it is fractions of milliseconds,” said Lewis.

The HFT orders — tens of thousands in less than a second — come and go so quickly that “firms make just fractions of a penny per trade, but the sheer speed and volume of their trading activity allows those that are successful to make significant profits,” according to Reuters[2].

Proponents of HFT argue that the presence of such firms makes it easier for all market participants to find buyers and sellers for their trades, and that the speed at which HFT firms can detect and take advantage of pricing imbalances between different markets[3] and assets leads to smaller bid-ask spreads.

Earlier this month, New York state’s Attorney General Eric Schneiderman said he believes U.S. stock exchanges and other platforms provide HFT firms with unfair advantages.

But a ban on HFT practices isn’t likely to happen — as such a ban would lead to a less liquid market.